I'm not self employed, why do you need my tax returns for a mortgage?

By
Mortgage and Lending with Amerifirst Financial, Inc.

A question that comes up quite often by potential borrowers is "I'm not self employed, why do you need my tax returns for a mortgage?" Now this may seem like a silly question to seasoned real estate and mortgage veterans. But the average home buyer may not realize what mortgage lenders look for when reviewing and analyzing tax returns. 

tax return

We all know that self employed borrowers must submit tax returns when applying for a loan as that is the best and most accepted method for verifying their income. But there are many other reasons why lenders and more importantly underwriters require tax returns to be reviewed.

Even if you are a salaried W-2 employee, there are things that may show up on a tax return that could impact your qualifying income. For instance:

  • Unreimbursed business expenses such as union dues, required uniforms, mileage, etc. are all examples of things that the employee must pay and is not reimbursed by their employer. Many times 100% commission employees such as loan officers will write off all their unreimbursed expenses which will decrease their qualifying income.
  • Rental properties or 2nd homes. Lenders must determine if borrowers own rental properties or other real estate and whether or not those properties have positive or negative cash flow. Some borrowers don't disclose rentals on their application if they don't owe anything on it and they don't need the rental income to qualify. But the lender wants to know any and all real estate owned by a borrower.
  • Capital Gains or Losses. If there are on-going gains or losses this could positively or negatively impact a borrower's income.
  • To verify other sources of income such as interest/dividend, alimony or retirement income.
  • Ensure no self employment when none was disclosed. Again, some borrowers may run a side business or be involved in a partnership in addition to their full time job. The borrower may think this is insignificant as there is not much income being declared, if any, but this business may be a way for the borrower to write off some expenses and therefore lower their taxable income. This is great for lowering taxable income and reducing federal and state taxes but it could also lower qualifying income for the loan.
  • Alimony paid. A borrower may fail to report that they pay alimony but it may show up on their tax return as a way to lower their taxable income.

These are just some reasons why lenders need to review borrowers' tax returns. So the next time you're asked why does my lender need my tax returns, you'll be able to provide your buyer with a good answer.

 

close

Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Markita Woods NMLS#190699 01/22/2011 10:32 AM
  2. Kevin Kelly 01/22/2011 07:31 PM
  3. Devona Garrigus 01/23/2011 09:52 PM
Location:
Arizona
Groups:
31 Days of January - New Years Resolution
Tags:
tax returns
loan qualifying
mortgage qualifying

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Rainmaker
131,744
Markita Woods NMLS#190699
WestStar Mortgage Inc NLMS#2925 - Woodbridge, VA
Queen of Mortgages - FHA, VA, Conventional, USDA

Joe thanks for clarifying this information. I wrote a similiar post Taxes and Buying a Home In Woodbridge, Va but your is more detailed and worthy of a reblog.

Jan 21, 2011 08:59 PM #12
Ambassador
1,600,701
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 800-610-7253 DRE01267479 - Costa M
You are so right that many borrowers don't understand why their tax returns are needed. This is a clear explanation of several reasons.
Jan 21, 2011 10:58 PM #13
Rainmaker
447,121
Vickie McCartney
Maverick Realty - Owensboro, KY
Broker, Real Estate Agent Owensboro KY

Hi Joe~  Almost all of the loan officers I have worked with have always asked for the last two years tax returns no matter what kind of loan they were doing.  It makes total sense to me.

Jan 21, 2011 11:26 PM #14
Ambassador
1,323,071
Tammie White
Benchmark Realty, LLC (615) 495-0752 or www.TWRealtyGroup.net - Franklin, TN
Franklin TN, South of Nashville

My daughter is a senior in high school and we just completed the FAFSA. Guess what, we had to file our tax return to do that. So what does college financial aid have to do with my tax return? A lot.

Jan 21, 2011 11:59 PM #15
Rainmaker
156,779
Tiffany Taylor
Platinum Funding Group, Inc.NMLS-243033 - Irvine, CA
Platinum Funding Group

Hey Joe,

As a fellow Broker, it's so nice to see that we have finally weeded out all of the "fly by night" loan officers... Now we are left with informed professionals like yourself that fullu understand underwriting guidelines...

Thank you;-)

Jan 21, 2011 11:59 PM #16
Rainmaker
161,200
Ryan Case
SCA Real Estate - Anaheim, CA
877-828-0710

Tax returns are needed for loans regardless of how you are paid, correct?

Jan 22, 2011 01:15 AM #17
Rainmaker
227,016
Bernadine Hunter, SFR, ACRE
Keller Williams Greater Columbus Realty - Columbus, OH
"Finding Solution to Your Real Estate Needs"

Great explanation on the need for tax returns. I just thought that it was a given. I know mine were required as far back as 2002.

Jan 22, 2011 05:43 AM #18
Rainmaker
765,629
Carol Zingone
Berkshire Hathaway Home Services Florida Network Realty - Jacksonville Beach, FL
Global Realtor in Jax Beach, FL - CIPS, SRES

Good post - we, in the business on a daily basis, totally understand WHY, but need to help the people who are not in the biz daily understand the ins and outs of what we do. h

Jan 22, 2011 08:09 AM #19
Ambassador
1,011,026
Harry F. D'Elia
Precision Real Estate Inc. - Phoenix, AZ
Investor , Mentor, CSSN, Radio Coach, REOs, ABR

The times have changed to disclose disclose disclose. The banks are checking to ensure that you filed ones tax returns. They have turned LOs into junior auditors.

Jan 22, 2011 09:42 AM #20
Rainer
53,635
Bea Lueck
Coldwell Banker Rox Realty - Casa Grande, AZ

As far back as 2001, I always questioned why my lender required tax returns on the investment properties we purchased.  Oh wait - because she was a great mortgage broker and qualified us with something more than a pulse! 

Jan 22, 2011 09:44 AM #21
Rainmaker
895,372
Michael Setunsky
Michael's Commercial LLC - Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Joe, good explanation for why tax returns are needed. Mortgage companies leave no stone unturned.

Jan 22, 2011 09:46 AM #22
Rainmaker
361,912
Karen Feltman
Cedar Rapids/Iowa City, IA Skogman Realty - Cedar Rapids, IA
Relocation Specialist

This is a good explanation of why tax returns are necessary for all buyers...especially in today's market.  Thank you for the information.

Jan 22, 2011 11:15 AM #23
Rainer
51,003
Joe Reed
Amerifirst Financial, Inc. - Scottsdale, AZ
Loans for Short Sales and Investors

Yes, we must get tax returns on all loans no matter the type of income earned. Again it's not always to verify the income but to make sure there no losses being taken in other areas like rental income, capital losses, or other businesses that are not disclosed on the application.

Unfortunately there has been so much fraud in the past 5-10 years that mortgage investors have no choice but to put every borrower under the microscope to ensure all facts are accurate on an application.

Jan 22, 2011 12:24 PM #24
Rainmaker
394,770
Kevin Kueneke
Samuel Scott Financial Group San Diego - Encinitas, CA
San Diego Mortgage Banker

Joe - great post.  I "lost" a potential client a month ago when I asked for their tax returns (the client owns 2 other properties and the mortgages are on his credit report). 

He claimed that another lender did not need them.  Guess what, the other lender finally required them 2 days before the closing and then said that he no longer qualified!  He came back to me, we found a co-signer (FHA kiddie condo) and closed the deal.

If a potential client will not provide what I need, then they do not get to pass Go.  Taking an extra 15 minutes at the beginning can save days and weeks of nightmares later.  Simple as that.

Jan 22, 2011 01:11 PM #25
Anonymous
Anonymous

Joe,

This is a great post because folks usually don't balk when the understand the reasons.  You spell them out very clearly.  Thanks!

Jan 22, 2011 01:26 PM #26
Rainer
32,489
Jacquie Cliff
Champions Real Estate Services - Lynnwood, WA - Lynnwood, WA
- Real Estate and Short Sale Expert

This is definitely a reaction to the bubble popping.  I wonder how many loans got done on fake W-2s?

Jan 22, 2011 04:15 PM #27
Ambassador
1,590,823
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

Joe, I completely understand the statement and the INVASION OF PRIVACY now by the mortgage lenders. Obviously in the past there was no need for W-2 employees to fork over 1040's. Times change. People STILL balk with the reasons.

Jan 22, 2011 05:24 PM #28
Rainmaker
174,982
Laura Forman
National Realty of Brevard www.LauraSellsBrevard.com - Melbourne, FL
Your Brevard Premier Property Specialist

Thanks for the post - I learned something new.

Jan 22, 2011 06:02 PM #29
Anonymous
Anonymous

Great post Joe!  Very detailed an important information. 

Definitely worthy of a re-blog.  Congrats on the feature!

 

All the best!

Jan 22, 2011 07:30 PM #30
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Joe.. money was given to easily and freely in the past... In the early to late 90's, tax returns were usually asked for anyhow... we got away from that and now it's a requirement in many cases. I know home buyers don't like this... but do you think us loan officers like getting more paper work again? lol Not me... good post with some good reasons.

jeff belonger

Jan 22, 2011 09:29 PM #31
Post a Comment
Spam prevention
Show All Comments
Rainer
51,003

Joe Reed

Loans for Short Sales and Investors
Ask me a question
*
*
*
Spam prevention

Additional Information